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PETITIONER: COMMISSIONER OF INCOME-TAX, MADHYA PRADESH

       Vs.

RESPONDENT: DEWAS CINE CORPORATION

DATE OF JUDGMENT: 08/11/1967

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. BHARGAVA, VISHISHTHA

CITATION:  1968 AIR  676            1968 SCR  (2) 173  CITATOR INFO :  R          1971 SC2270  (5)  E          1973 SC1357  (9)  F          1980 SC 176  (3,9)  RF         1986 SC 368  (12)

ACT:     Indian   Income-tax  Act,  1922,  s.  10(2)  (vii)   2nd proviso--Two   persons  entering  into   partnership,   each contributing  a  cinema theatre dissolution  of  partnership theaters  returned  to respective owners at  original  price -Depreciation  equally divided between  partners--Return  of theatres  whether  sale for purpose of  s.  10(2)(vii),  2nd proviso.

HEADNOTE:     S  and  H formed a partnership to carry on  business  in partnership as exhibitors of cinematograph films with effect from  March  1, 1947.  Each partner who was an  owner  of  a cinematograph  theatre   brought his theatre into the  books of  the partnership as an asset of the partnership. For  the assessment years  1950-51  to 1952-53 the Income-tax Officer allowed depreciation aggregating  to Rs. 44,380/- in respect of   the  two theaters.  The partnership  was  dissolved  on September 30, 1951, and on dissolution it was agreed between the  partners that the theaters should be returned to  their original owners.  In the books of account maintained by  the partnership,  the  assets   were shown  as   taken  over  on October 1, 1951, at the original price less the depreciation allowed-the  depreciation being equally divided between  the two  partners.  In proceedings for assessment for  the  year 1952-53  the respondent  was treated as a  registered  firm. The  Appellate  Tribunal  held that  by  restoring  the  two theaters to the two original owners "there was a transfer by the  firm  and the entries adjusting  the  depreciation  and writing  off  the assets at the original value  amounted  to total    recoupment  of  the  entire  depreciation  by   the partnership. and on that account" proviso 2 to s. lO(2)(vii) of  the Income-tax Act, 1922, applied.  The High  Court.  in reference,  held  in favour of the  assesses.   The  Revenue appealed,  contending, that on the transfer of the  theaters from  the  partnership to the original owners  there  was  a

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sale.     HELD:The expressions "side" and "sold" are not.  defined in   the  Income-tax Act: Those expressions are used  in  s. 10(2)(vii)  in their ordinary meaning.  "Sale" according  to its ordinary meaning is a transfer of property for a  price. and adjustment of the rights of the partners in a  dissolved firm is not a transfer, nor is it for a price.  [176A-B] A  partner  may, it is true, in an  action  for  dissolution insist  that the assets of the partnership be.  realised  by sale  of its assets, but where in satisfaction of the  claim of  the  partner to his share in the value  of  the  residue determined  on  the footing of an actual  or  notional  sale property is allotted, the property so allotted to him cannot be deemed in law to be sold to him.  1176E]     Addanki  Naravanappa  and Anr. V.  Bhaskara   Krishnappa and  Ors. [1966] 3 S.C.R. 400, referred to.

JUDGMENT:     CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2163  of 1966.     Appeal from the judgment and order dated April 15,  1964 of the Madhya Pradesh High Court in Misc. Civil Case No.  22 of 1963. 174     Niren  De, Solicitor-General, S.K. Aiyar, R.N.  Sachthey and S.P. Nayar, for the appellant. Naunit Lal and B.P. Singh, for the respondent. The Judgment of the Court was delivered by     Shah,  J.  S.G. Sanghi and Hari Prasad entered  into  an agreement to carry on business in partnership as  exhibitors of cinematograph films in the name and style of "Dewas  Cine Corporation"  with effect from March 1, 1947.  Each  partner who  was  an owner of a cinematograph  theatre  brought  his theatre into the books of the partnership as an asset of the partnership.   For the assessment years 1950-51  to  1952-53 the  Income-tax Officer allowed depreciation aggregating  to Rs.   44,380/-  in  respect  of  the  two   theatres.    The partnership  was  dissolved on September 30,  1951,  and  on dissolution  it  was agreed between the partners,  that  the theatres  should be returned to their original  owners.   In the  books  of account maintained by  the  partnership,  the assets  were shown as taken over on October 1, 1951  at  the original   price   less  the  depreciation    allowed    the depreciation    being  equally  divided  between   the   two partners.     In  proceedings for assessment for the year 1952-53  the respondent was treated as a registered firm.  The  Appellate Tribunal held that by restoring the two theatres to the  two original  owners "there was a transfer by the firm  and  the entries  adjusting  the  depreciation and  writing  off  the assets at the original value amounted to total recoupment of the  entire  depreciation  by the partnership  and  on  that account"  proviso 2 to s. 10(2)(vii) of the Income-tax  Act, 1922,  applied.  The High Court of Madhya  Pradesh  answered the  following question referred to it by the  Tribunal  the negative:                     "Whether   on  the  facts  and  in   the               circumstances  of the case, the amount of  Rs.               44,380/-  was  rightly included in  the  total               income  of  the assessee in the  year  1952-53               under the second proviso to s. 10(2) (vii)  of               the Income-tax Act ?"               The Commissioner of Income-tax has appealed to

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             this  Court  with certificate granted  by  the               High Court.                   Section   10(2)  of  the  Income-tax   Act               permits  certain allowances to be  debited  in               the  computation  of profits or gains  of  the               business, profession or vocation carried on by               the assessee in the year of account; one  such               allowance  is  prescribed by  cl.  (vii),  the               material part of which is:                     "in   respect  of  any  such   building,               machinery  or  plant which has  been  sold  or               discarded or demolished or des-               175               troyed,  the amount by which the written  down               value  thereof exceeds  the amount  for  which               the building, machinery or plant, as the  case               may be, is actually sold or its scrap value:               Provided that                     Provided  further that where the  amount               for  which  any such  building,  machinery  or               plant is sold, whether during the  continuance               of  the  business  or  after  the,   cessation               thereof,  exceeds the written down  value,  so               much  of  the excess as does  not  exceed  the               difference  between the original cost and  the               written  down  value shall be  deemed  to.  be               profits of the previous year in which the sale               took place :" In respect of each of the theatres depreciation was  allowed by  the  taxing authorities in proceedings  for  assessment. The  Income-  tax Appellate Tribunal was of  the  view  that since the theatres were returned to the partners in settling the  accounts of the partners on dissolution,  the  theatres were in law sold to the partners.  The High Court  disagreed with that view.     Under  the  Partnership  Act, 1932,  property  which  is brought  into  the partnership by the partners  when  it  is formed  or  which  may  be acquired in  the  course  of  the business  becomes  the  property of the  partnership  and  a partner  is,  subject to any special agreement  between  the partners, entitled upon dissolution to a share in the  money representing  the  value  of the  property.   When  the  two partners  brought  in  the  theatres  of  their   respective ownership into the partnership, the theatres must be  deemed to have become the property of the partnership.  Under s. 46 of the Partnership Act, 1932, on the dissolution of-the firm every partner or his representative is entitled, as  against all the other partners or their representatives, to have the property  of  the firm applied in payment of the  debts  and liabilities of the firm, and to have the surplus distributed among  the  partners or their representatives  according  to their  rights.  Section 48 of the Partnership  Act  provides for the mode of settlement of accounts between the partners. It prescribes the sequence in which the various outgoing are to  be applied and. the residue remaining is to  be  divided between  the partners.  The distribution of surplus  is  for the  purpose of adjustment of the rights of the partners  in the  assets  of  the  partnership; it  does  not  amount  to transfer of assets. On  dissolution  of the partnership, each  theatre  must  be deemed to be returned to the original owner, in satisfaction partially  or wholly of his claim to a share in the  residue of  the  assets  after  discharging  the  debts   and  other obligations.  But thereby the theaters were not in law  sold by the partnership to the individual

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176 partners  in consideration of their respective share in  the residue.  The expressions "sale" and "sold" are not  defined in  the  Income-tax Act;-those expressions are  used  in  s. 10(2)(vii) in their ordinary meaning.  "Sale", according  to its ordinary meaning is a transfer of property for a  price, and adjustment of the rights of the partners in a  dissolved firm is not a transfer, nor it is for a price.     The   Solicitor-General  appearing   for   the   Revenue submitted  that each partner is entitled to have the  assets of  the  partnership  sold for  discharging  the  debts  and obligations  of  the partnership, and for  the.  purpose  of dividing  the  residue  among the partners  if  property  is allotted  to the partners in satisfaction of  their  claims, the transaction must be deemed in law to take the form of  a notional   sale   of  the  property  to   the   partner   in consideration  of  the money value of  his  share.   Counsel relied  upon  the  statement  of  the  law  in  Lindley   on Partnership, 12th Edn., at p. 568:        "........in the absence of a special agreement to the contrary,  the right of each partner on a dissolution is  to have  the  partnership property converted into  money  by  a sale,  even  although a sale may not be  necessary  for  the payment of debts.", and  also  upon  the  decision  of  this  Court  in  Addanki Narayanappa   and   another  v.  Bhaskara   Krishnappa   and others(1).   A partner may, it is true,  in an   action  for dissolution   insist that  the assets of the partnership  be realised by sale of its assets, but where in satisfaction of the  claim of the partner to his share in the value  of  the residue  determined on the footing of an actual or  notional sale  property is allotted, the property so allotted to  him cannot be deemed in law to be sold to him.     The High Court was, therefore, in our judgment, right in deciding  the question referred in favour of  the  assessee. The appeal fails and is dismissed with costs. G.C.                     Appeal dismissed. (1) [1966] 3 S.C.R. 400. 177